Understanding What Recessions Are

One of the misunderstandings about recessions is what actually happens in the real world. A recession is where economic growth stops, and you are left with flat to contracting sales.

Note that economic activity does not grind to a halt -- the year-over-year growth rate merely slips into the negative. This is often misstated, in some variation of "Gee, how it can it be a recession -- I was out shopping and the stores were pretty crowded." Whenever you see that, the speaker is either technically misunderstanding what a recession is -- or alternatively, is painfully long and hoping for the best.

Of course, Growth may falter, not total economic activity. With the $13 trillion US economy, economic
activity certainly won't fall to zero dollars. Everyone is still
eating, driving to work, using electricity, phones, buying iPods, etc. If economic activity were to fall to an annual run rate of below $13 trillion dollars for a few quarters, well then there's your mild recession. If it drops much below the $12.75 - 13 trillion dollar range, that's a bit more serious contraction. Indeed, the greater the year over year contraction in economic activity, the deeper the recession.Consider Housing: Sales don't drop from ~7m homes sold to
zero; rather, the number drops significantly (i.e., 4.5m sold). It only
seems like nothing after ther boom years.

But even if US activity were to drop a huge trillion dollars in a year -- thats still a $12 trillion of economic activity, and that typically involves one or two people still going shopping and out to eat occasionally.

So far, we are only at the point where Real Sales have slipped into negative year-over-year territory. High food and energy prices, as well as health care, are keeping nominal sales positive. Outside of that, we see clothing, autos, homes all negative. Consumer Technology spending, and business CapEx spending remain positive.

Indeed, while many aspects of the economy are revealing marked weakness, select areas are still hanging on. We are just as likely to be in a recession -- as not -- as of February 19th, 2008.

Note: We were out and about this past 3 day weekend (its not all linkfests); Our anecdotal expeiences are after the jump...

Anecdotal Shopping Experiences

We were out east this past weekend, checking on the damage done to
the beach house by the past few Nor'easters (yards a mess, house is
fine).

Saturday night, we went out for local lobster at one of our favorite joints (Indian Cove) --
during the summer, we always make reservations, but its February, so we
didn't. It was pretty crowded, and we waited about 10 minutes for a
table.

On Sunday, we hit Tangers (SKT), the big Outlet Mall in Riverhead, to do some, as Missus BP calls it, "Economic Research."

President's Day sales were everywhere, and the discounts were rather
aggressive. Also note that the Seasonal merchandise changeover was in full effect, as the winter clothes get aggressively marked down. The parking lot was crowded, but not totally jammed -- we
had no problems finding a spot in the middle of the lot. (Around Xmas,
you can circle for days).

I noticed a few things about the Outlet Center: The "aspirational
luxury" brands -- Ralph Lauren, Coach, Lucky Brands, Cole Haan, Kenneth Cole,
etc -- all had pretty aggressive sales. Even though this was an outlet
mall, they usually don't do big discounting.

Spotted quite a few empty stores -- more than usual. The Gap and Levi's had both moved to smaller quarters. New store openings ranged from high end to low, including Oakley (LUX), UnderArmor (UA), and Coldwater Creek (CWTR).

We did quite a bit of shopping. Pardon all the Retail name dropping, but it will illustrate the degree of discounting that was so prevalent this weekend -- especially in stores not known for aggressive price cutting:

- At Coach (COH), Mrs. BP scored a Coach bag and wallet, 20% off; She ended up finding one she liked even better at Kenneth Cole (KCP) at 40% off (back went the Coach stuff);

- At Ralph Lauren (RL), she found a pair of white denim; I got a few polo shirts at 30% off.

- My better half also got two pairs of jeans at Lucky Brand Jeans; The deal was Buy one,
get the next item 50% off (BOGO). Also, I got a very retro West Coast Muscle Car long-sleeve t-shirt at 70% off. Who
pays full price for this crap is beyond me. My Über-shopper
sister-in-law said the jeans were about $120+ each. For all 3 items, we
paid less than $100.

- Saks Fifth Avenue (SKS) also had a BOGO 50% off sale. Lots of high end euro designers (bought nothing).

- After 10 years of abuse, my ballistic nylon Timberland (TBL) briefcase has been
showing some wear. I finally broke down and bought a gorgeous new
leather briefcase at Cole Haan (NKE). I first spied it at Bergdorf's or
Nordstrom's (JWN) this past Fall for an absurd price, and didn't even think
of buying it. It was listed for half the store price, plus they had a
20% off sale.

-On Monday, Macy's (M) opened an hour early for their big President's Day sale, 30-60% off most items. (It was not crowded at all). I grabbed a pair of Levis
(30% off), and a very nice Nautica (VFC) turtleneck for 60% off. Saw the same Polos shirts I bought at the outlet center -- at Macy's, it was ~twice the price. The Über shopper had Macy's
mailed discount cards, so we got an additional $10 off, plus
another 20%. I think they paid us to cart the stuffout of the store.

~~~

One of the things I find interesting is what you can -- and cannot discern -- from anecdotal experiences.

The stores were busy, but not jammed. Discounting was aggressive,
reflecting a combination of weak spending and seasonal changeover.

I do not think I could draw the conclusion that we either are definitely in -- or NOT in -- a recession. Too regional, too random.

The most I can conclude is that it seemed a little softer than usual at the outlet center for an off-Summer season, holiday weekend sale.

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Comments

This seems to tie in to Joseph Ellis's thesis in "Ahead of the Curve" that the importance of an actual technical recession is overstated. Most of the financial pain comes as an economy is undergoing the transition from high growth to low growth. By the time we get to actual negative numbers the bulk of the damage has already occurred.

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